Market Commentary 1st Mar 2012

There was an impressive 1st-of-the-month rally today in Equities as we saw decisive buying across the board, despite a weaker than expected ISM figure, resulting in a complete reversal of yesterday's panic sell-off in the FTSE! Reasons for this? Well; clearly we have reached the stage in this Bull market where negative economic data is merely being shrugged-off and any sell-off is considered a buying opportunity.  You could make the argument that Ben Bernanke's testimony has in fact reassured the market and is seen as a positive indictment on the health of the economy as the Fed doesn't seem to think that there is need for further stimulus.  Personally I don't buy this: The stock market and the economy are running on different time-lines and this entire Bull market in global equities has been driven by massive liquidity injections from day one.  So perhaps QE3 was never priced in by the market to begin with or the Fed has no credibility and Ben Bernanke's statement is not seen as decisive enough to convince the market of anything.  Market analysts who hold this view are pointing to a supposed fat finger yesterday evening that triggered a cascading effect in the global markets rather than a wide-spread sell off as a result of the content of Bernanke's testimony.  Judging by today's response in the stock market there may be some validity to this argument and although T-Notes have continued to sell-off; I would expect a much more aggressive move if the market was re-pricing an end to Fed Bond buying.  The problem is; when we look at Gold and USD there was an unambiguous response to the Bernanke testimony which has held  throughout today whilst Stocks have rallied.  Clearly, therefore, the market has taken the hint at less Fed dovishness seriously. So where does this leave us?  Ultimately the market will go where it wants to go and if we look at the fact of price behaviour it can be seen that Stocks are clearly Bullish while Gold failed to rally from its lows today and the Dollar has remained strong.  The complication of continued stimulus coming from the ECB may also be a contributing factor, but regardless of the catalyst, this tells us everything we need to know about the underlying sentiment in these markets and could even be a harbinger for a return to the traditional risk-on/ risk-off correlations in the Gold, Dollar and Equity markets.  This in itself would suggest a change in expectations about Central Bank policy and Quantitative Easing in particular.  Going forward, therefore, I will be watching for opportunities to short Gold and get long Equities on price-action retracements.  

Following on from the above post note the 1hr chart for Gold which has formed a Flag/ Triangle pattern with the 38 Fib providing short-term resistance.  There may be an opportunity to get short on a break of the flag or if price trades up to significant resistance at 1751.7 and the 618 Fib where I have left a sell order for the overnight session.

In the same vein; the EUR/USD pair has been unable to trade up in correlation to other risk assets including Equities and has instead formed a compression triangle as seen above.  I will be looking for opportunities to get short following on from Wednesday's outside bearish day and ideally expect to see a false-break of the triangle formation to the up-side before continuing the down trend.